Wednesday, August 18, 2010Last Update: 10:29 AM PT

Shareholders Sue Dov Charney

By TIM HULL

LOS ANGELES (CN) - Shareholders claim American Apparel, a publicly traded "distributor and retailer of 'hip' clothing for men, women, children and dogs," is on the verge of delisting, its stock price down more than 90 percent, after having to lay off 1,800 factory workers who could not prove their citizenship. Shareholders blame CEO Dov Charney, who founded the company in the 1990s, took it public in 2006, and claimed in ads that his clothes are "Made in the USA." The shareholders' derivative complaint claims that Charney and his board of directors misled investors, mismanaged the company and "irreparably damaged" its image. The clothing company, based in downtown Los Angeles, employs about 10,000 people around the world and runs 285 retail stores in 20 countries, according to the complaint. Shareholders say the share price has crashed from a high of $16.80 in December 2007 to $1.03, "because the company has had to disclose - not once, but twice - that its independent accounting auditors have found material weaknesses in its financial controls." The complaint adds: "American Apparel has been beset by other problems, including having to lay off 1,800 experienced manufacturing employees who could not provide legal documentation in response to a federal immigration investigation. Losing one third of its manufacturing employees seriously damaged American Apparel's manufacturing efficiency and also seriously damaged its public image, since one of its main selling points is that its garments are 'Made in the USA.'" Independent auditor Deloitte & Touche found that American Apparel failed to maintain adequate control of its accounting and financial reporting since 2008, according to the complaint. The auditor broke with the company in July "based on its doubts about the reliability of American Apparel's 2009 financial statements," shareholders say. American Apparel received a federal subpoena in New York related to its problems with Deloitte & Touche, The New York Times reported Tuesday. The company has not filed financial statements for the past two fiscal quarters and is "on the verge of being delisted from the New York Stock Exchange," shareholders say in their complaint. American Apparel's stock closed at $1.03 on Tuesday. Along with lead defendant Charney, shareholders sued seven other directors. They seek restitution and damages, and want American Apparel to allow stockholders to elect at least three board members, and other corporate reforms. They are represented by Frances Bottini Jr. with Johnson Bottini of San Diego.